Gold Market and Precious Metals Commentary

Technicals -

The genie is in the bottle. The deflation play bears stormed out of their short term hibernation over the US holiday period with guns blazing and sent the price of gold down from the high $290 level for the umpteenth time. $300 resistance, basis Feb, held like the Rock of Gibraltar, again. Today, may have been different, but last week the open interest on Comex dropped even further to 148,491 contracts as the trade exited short positions. Gold is now back to the middle of its trading range for the past year or so.

Silver is testing the bottom of its recent trading range and needs to hold this area or it could suffer in the period ahead. We think it will hold. The premiums in India at 11% now, remain firm and indicate ample demand from that sector. With copper and oil making lows today, silver was under spec attack by deflation players and could have really collapsed. It did not. If the past recent period is an indicator, the price of silver will turn around sharply just when it looks its worst.

Fundamentals -

In our last Midas ( Nov. 24, and can be found by going to the library below ) we spoke of the quiet buzz going around that the gold price is being controlled. For some anecdotal evidence, we offered up Alan Greenspan's own comment: House Banking Committee, July 24, Alan Greenspan, " central banks stand ready to lease ( i.e. lend ) gold in increasing quantities should the price rise".

After the last interest rate cut by our Fed, we had a visceral reaction to Alan Greenspan's strong public mention of low commodity prices as one of his main reasons for the cut. This comment really hit home after his previous July 24 comment about gold. It appeared he was subtly making it clear that a rising gold price would not allow him to do what he wanted to do for the reasons he wanted to do them; certainly, a rising gold price would make his rate cut decisions more controversial. Therefore, we feared he might do what he could to keep the gold price from going up. His comments left an indelible effect.

And Alan Greenspan is accomplishing what he set out to do, so far. Certainly the most esteemed economist in the US, Ed Hyman, thinks so. www.lemetropolecafe.com member, George S, alerted me to Hyman's recent analysis according to Bloomberg News,( Nov. 27 ) : "ISI's Hyman Says Gold Signals More Bond Gains".

" The bond market's favorite economist is telling investors that the Treasury market rally of 1998 isn't over-- and the price of gold is one reason. Ed Hyman, ranked the No. 1 economist on Wall Street for the past 19 years in an Institutional Investor poll, says the fact that the metal's price isn't far from a two-decade low suggests that the Federal Reserve may not be finished reducing interest rates, after three cuts in the past two months"…..

"Since the 1980's, the final rate cut in a series of reductions has been preceded by a spurt in gold prices, reflecting expectations for growth and the potential for faster inflation. Yet at today's price of $297 an ounce, the metal hasn't risen much from a 19 year low of $2.77.90 on Aug. 28."

Let us not forget that the rate cuts, by the Fed's own admission, were initially undertaken because of systemic risk problems and specifically the strain caused by out of control derivative traders. That systemic risk has not gone away yet. Therefore, the need for low interest rates and probably more rate cuts. If the price of gold were to take off now, would the esteemed Ed Hyman feel the same way he did on Nov. 27. Hyman has a big following. How would other economists react to a popping gold price? Would Alan Greespan cut the interest rates with such chutzpah? Would the stock market rally like it has?

It is clear why Alan Greenspan wants the gold price to stay down. But what Ed Hyman does not realize ( as it is not in his realm to focus on this subject like we do ) is that the gold price is being held down. That is a big difference from sloshing around below $300 on its own natural accord. The gold genie is being corked in the bottle by Alan Greenspan and other central bankers. They are buying time, or at least, trying to buy time. In past Midas' we have given you many anecdotal examples of how that is being done.

If Alan Greenspan be against us, who can be with us? Are we foolishly betting against the casino by vigorously advocating a very bullish stance here? No we are not! There is a bigger casino out there and that is the world casino. The natural mine supply/ demand deficit is probably somewhere in the 800 tonne per year category and will be much larger at these price levels as pre Asian crises demand returns. That deficit must be met by central bank selling or bullion bank lending. Pre EMU selling will have subsided by year end, so bullion lending must pick up that slack. Since some market participants believe, the big league, pre EMU CB selling has ended by now, it makes sense that all of a sudden there is a "buzz" about U.S. led, lending initiatives in the past couple of months.

What is important to understand is that as the big pre EMU selling is grinding down, Asian demand is beginning to come back nicely. We have alerted Midas followers many times to the fact that the Asian official sector has been buying for months. That is why gold price breakdowns have seen no follow through. And gold buying by the public in some Asian countries is also resurgent. According to John Brimelow:

"At virtually 20 tonnes, October's Tokyo gold imports raised 1998 cumulative by 43 %, being the biggest monthly volume since Nov 1995." As the kilo bar premiums in Tokyo are running at 80 cents to $1.30, after a serious discount in the second quarter, healthy imports are likely to continue."

There is more, and the more is what our Treasury Department and Fed do not want us to think about. While the CRB Index, copper and oil are at, or making, making multi-year lows lows, the price of gold is about $15 off its lows and trading midway in its range for the past year. We suggest there is a good reason for that and the reason is that gold's monetary role is on its way back to visibility and proper respect. The anecdotal evidence is overwhelming:

1. Our sources tell us that an Asian IMF type of institution is in the works. It will be Yen based with a gold backing.

2. The Europeans, all of a sudden, are floating a euro gold coin concept that will require substantial gold tonnage for minting purposes.

3. The Russians have cut the VAT tax on bullion and are encouraging gold consumption.

4. With the US printing presses working overtime and M3 exploding, gold gains in relative value every day.

5. Coin sales around the world are surging. U.S. bullion coin demand is at 11 year highs. Y2K potential mega problems are having a big impact here.

The bottom line is: the investment demand for gold is flashing a big green light.

Ironically, we will use the research analysis of the highly regarded Kevin Crisp of JP Morgan for our own purposes of focusing on the Greenspan led, lending cabal, even though we it appears that we completely disagree on the price outlook for gold and what is really going on in the gold market. The title of his Nov. 17 piece out of London is:" Lease rates offer clues for gold prices".

We will focus on his comment, "Combination of factors push lease rates lower"- "The level of lease rates reflects a combination of factors. The recent fall in rates suggest that despite a global credit crunch, there has been no noticeable withdrawal from the market by central bank lenders of gold. To an extent the opposite has been true, with "lending" on a swap or collateralized basis from emerging market sovereigns tending to increase, reflecting a need for currency liquidity."

According to Kevin ( JP Morgan is part of the bullion lending cabal and has quite the profit motive that it continue without controversy ), the official sector has been increasing its gold lending while credit constraints are everywhere else. How can this be? We have repeatedly highlighted the fact to you that our sources tell us the gold loans outstanding are about 7 to 8,000 tonnes and could be as high as 14,000 tonnes. Yearly mine production is about 2550 tonnes. If there ever was a market where prudent credit should be contracting, it is this one. There is enormous danger here of a gold buying panic at some point in time and force majeurs all over the place. Bankers, wake up! Alan Greenspan's wink is only good for so long.

Thank goodness, we are not a lonely voice in the wind, or worse, peeing into it ( although it was a bit misty here in N.H. today ). In our last Midas we told you that we have heard that certain bullion banks are in trouble for this very reason and that the word is getting out. That word is that if the price of gold takes off, these bullion banks have extended too much gold for lease and are exposed to defaults.

We believe Merrill Lynch understands the danger and that is why they have pulled out of the gold lending game and ceased commodity derivative operations. And then last Wednesday a real surprise:

Bloomberg -Nov 26 - Sydney - " Normandy Mining Ltd. said it will realize 85 percent of the value of its forward gold sales booked over the next 10 years, giving it a profit of A$650 million. The Australian miner, one of the world's 10 largest gold miners, said it bought back 4.1 million ounces of its previously contracted gold sales, and says it replaced the sales with options.

Reuters- Nov. 25 (US time)- Sydney - " The transaction will simultaneously eliminate potential bank counter party risk," Normandy said in a statement.

In other words, it is our opinion that Normandy Mining understands what we are telling you and have acted accordingly by shifting a good portion of their short position from futures to puts ( which limits their exposure in the market place in the event of a price explosion ). They know that something could trigger an incredible short covering rally in the price of gold and they do not want to be involved in some of the market delivery problems that could develop. Thus a major change in strategy. This is an important event for the gold market. It is telegraphing us what may be to come or, at least, what concerns are beginning to circulate in the gold producer community.

What we have just outlined to you is why we are so bullish on the precious metals. For every action, there is a reaction. When the gold genie gets out of the bottle, by hook or by crook, he will not be a happy camper. His rage will be taken out on the shorts and the price of gold is going to go up faster and farther than almost anyone thinks. $335 gold is the first stop near term, then $400, proceeded by a panic move to $600 the ounce when $425 is taken out. It is only a matter of time before this price process unfolds.

Potpourri and the Gold Shares -

The XAU was trounced today and closed at 70.96 down 3.65 but is over 22 points off of its August lows.

Australian gold output declined for the third quarter in a row. This year's production will be only slightly less than last year's record output, but exploration cutbacks are sited as a reason for the cutback in trend output. Australia's producers have not been the only ones to cut exploration budgets. This will affect world gold mine supply in the years to come.

According to T. Hoare & Co's Rhona O'Connell in a Nov. 30 Reuters interview," Less metal for hedging, and miner's recent tendency towards buying put options in preference to classic forward hedges could limit the supply of fresh metal to the market next year, she added."

"It is entirely possible that the impact next year of the mining industry's hedging activity could actually be a negative number," she said, adding the net effect of hedging over the past ten years had been to add 240 tonnes per year." If Rhona is correct, this represents a figure that is almost 10% of world mine production, so it could be a rather important development that has not been factored into the market yet.

The Hong Kong tael premiums were 30 cents as of today, and are just that, premiums instead of discounts. Anecdotal evidence of the return of a stronger Asian market.

Treasury Secretary Rubin's old firm, Goldman Sachs, was the big seller of gold on the opening today. A real surprise with the previous close of the new active trading month, February, at $299???

We have made comment of the old wink program by our officialdom about lending gold, etc. According to a Reuters report, Asia Dresdner Bank Chairman, Rolf Willi, said in an interview at the India Economic Summit in New Delhi that " gold is today no longer a monetary instrument and this means that we will find ourselves, unfortunately, $100 lower than what we have today."

Dresdner is a gold lender. Any question as to where at least some of the Greenspan orchestrated lending is coming from. It becomes more intriguing when one realizes fellow German bank, Deutsche Bank, bailed out tottering Bankers Toast ( Trust ) for some enormous sum.

Do not despair. This report is very good news. Dresdner was one of the big German banks at the forefront of the bull gold market which peaked at the start of the 1980's. Here is a quote from the same article. " When it hit $850 we were all smoking big cigars, just to see it go phut, " he ( Willi ) recalled from his days as head of treasury and trading in Frankfurt. He probably was smoking a cigar in this interview too.

While Willi was smoking whatever, Bundesbank council member, Jans-Juergen Koebnick said in a Bridge New interview that selling excess German central bank gold reserves after Eurpoean Monetary Union next year was "no topic at all.'' Koebnick also did not expect other eurozone central banks to dump gold on the market. This completely contradicted Willi.

The U.S. savings rate was negative for the second consecutive month in row. Why save- buy the internets. A few more hiccups like today though and 3% might look a little more appealing. The Santa Rosa Democrat reported over the weekend health insurance premiums are set to go up 8 to 20% this coming year. Prepare for a big flap here. This is about mid range of the M3 growth.

The Rubicon - $300 gold and $5 silver. When these resistance points are both crossed decisively and hold, it should then signify the true end of the 19 year precious metals bear market. This is no Einstein statement but it might help those investors that want to add to their precious metals holdings or initiate new ones. Prices north of these strong resistance points ought to bring the gold and silver shares back from oblivion. We remain strongly committed to them now and continue to accumulate as we believe a major positive turn of events for gold and silver is likely to come out of nowhere.

Today was no fun, but perhaps it might be helpful to keep everything in perspective by keeping in mind how quickly AND dramatically the precious metals outlook can change. From our own Greg Pickup who sent me this today from, "Icicles in the Greenhouse" - " Dr. Imbrie of Brown University adds chilling details showing that the end of an interglacial period can be sharp and dramatic, as indicated by mastodons found in Siberian and North American ice packs, so quickly frozen that wildflowers they were chewing were still fresh between their teeth." Gold bears take note!